The Threat of Punitive Damages Revisited

Insurance fraud is an intentional act on the part of an insured, designed to gain an undeserved benefit. It can be opportunistic or premeditated. Claims professionals walk a proverbial tightrope when navigating suspicious claims. The high risk nature of fraud claims should not dissuade adjusters from properly adjusting, assessing and even denying skeptical claims.

Fraud is an increasing problem in our industry. The incidence of fraudulent claims measured in 2005 is almost double the 15 per cent figure of claims containing some element of fraud reported more than a decade ago by the Insurance Bureau of Canada.¹ Statistics show that of the $20 billion paid out in 2005 in property and casualty claims, 20 to 30 per cent contained some element of fraud.² That’s $4 to $6 billion dollars of insurance dollars lost to suspicious claims!

Unfortunately, many Canadians don’t see insurance fraud as a serious problem.  A poll conducted by the Canadian Coalition Against Insurance Fraud revealed that 46 per cent of Canadians believed it was easy to submit fraudulent claims, and 5 per cent said that “padding” a claim was acceptable.³ The direct correlation between increasing insurance premiums and the incidence of fraud is somehow lost on the general public.

Risks

The “swing” value of a fraud case is large. Appellate courts have recently held that nothing is to be awarded to a plaintiff if “any” aspect of the claim is proven fraudulent, even if part of the claim is legitimate.⁴ On the other hand, unproven allegations of fraud can lead to significant punitive damages awards for bad faith claims handling.  In the 2002 Whiten v. Pilot Insurance Co.⁵ decision the Supreme Court of Canada upheld the jury’s $1 million punitive damages award against Pilot in a situation where it failed to prove that the insured had committed arson.

Proving fraud

The test for proof of fraud in a civil case was established by the Supreme Court of Canada in 1924⁶ wherein it was held that “fraud is proven when it is shown that a false representation has been made (1) knowingly, or (2) without belief in its truth, or (3) recklessly, carelessly whether it be true or false.”

This test continues to be cited by Canadian Courts as the accepted standard for proof of fraud, although in reality it can be much more difficult to prove.  There are virtually no reported decisions where fraud has been proven on the basis of recklessness or carelessness. Practically speaking, fraud must be shown to have been committed intentionally. Fraud, therefore, is an intentional misrepresentation of the insured.

Proving intention

Most provinces have legislation permitting courts to provide an insured with ‘relief from forfeiture’ in situations where the claim details may not be entirely accurate and, as many of us are (painfully) aware, this is often used as a convenient technique to circumvent a legitimate denial of a fraud claim that cannot be strictly proven. A 1985 Nova Scotia decision was more recently quoted by the Ontario Court of Appeal wherein it was stated:

I doubt that there are many Proofs of Loss filed in insurance claims that are exactly accurate.  Some leeway must be made in allowing for puffery or establishing a negotiating position.  When it is determined that the claimant is indeed indulging only in puffery or in attempting to establish a negotiating position, fraud should not be imputed to the claimant.⁷

On the other hand, outright lies on a proof of loss will not be tolerated by the court. Adjusters must ensure that there is a way to distinguish the difference between intentional dishonesty and honest mistakes.

Credibility of the insured

The claims handling strategy in a suspected fraud case has to focus on the insured. A successful defence will depend on whether the insured’s credibility can be challenged or destroyed. Trial judges have been directed by appellate courts to make specific findings of credibility and to provide reasons for either accepting or rejecting the claim on that basis. In Sagl, the Ontario Court of Appeal directed a new trial after setting aside a $500,000 punitive damage award because the trial judge failed to adequately consider the issue of the insured’s credibility and whether Sagl was able to prove the loss of her fine arts collection. Sagl was an avid art collector. When she ran out of wall space, she stored fine works of art in every “nook and cranny” of her home. Before it was destroyed by fire, her home was overflowing with works listed on her proof of loss to be in excess of $10 million. This, despite the fact that the proof of loss did not contain the authentic Cézanne painting and Fabergé egg as Sagl forgot to include them.

On credibility, Sagl had been criticized in other courts to have appeared “to be completely dishonest and evasive” and her “financial disclosure was incomplete and untruthful.”⁸ Sagl’s credibility was considered in the 2011 trial decision where it was held that “it is not helpful to make a blanket statement concerning credibility . . . Rather, one has to look at the extent to which Ms. Sagl’s evidence is confirmed by other evidence.”⁹ The misrepresentation on the proof of loss did not invalidate the policy because the Court looked at her motives and compared them to other evidence in order to determine intentional fraud.¹⁰ The authenticity of each contentious item was considered and the credibility of the plaintiff, appraisers and witnesses were assessed as it related to each specific item.

The 2011 trial decision in Sagl did not order punitive damages, however the Court did award substantial indemnity costs for both trials against the insurer. It was stated that the insurer, “was entitled to take steps to protect itself from someone whom it reasonably believed was a renegade insured.”¹¹

Identity of the perpetrator

The insurer must prove that it was, in fact, the insured that committed the fraud. In a car theft claim, where the insured’s Porsche was recovered by police in an entirely stripped condition, the insurer suspected fraud when a salvage purchaser put the exact same tires on the recovered Porsche that was claimed to have been stolen. The Court concluded there was fraud involved but the insurer still had to pay the insured’s claim because there was insufficient proof that the insured himself was involved with the fraud.¹²

Objective investigation

Objective investigation and proper file handling protocols are crucial in order to safely prove the intentional misrepresentation of an insured without generating exposure to punitive damages.

Experienced claims handlers and crime investigators agree their first hint a claim is fraudulent generally involves a gut feeling, or instinct that something is not right. The importance of that early, subjective feeling cannot be over-emphasized in identifying potentially fraudulent claims although, once identified, it is crucial to have an objective, claims handling framework within which the examiner can gather the evidence to prove the fraud.

A company-wide claims handling protocol, with pre-determined procedures and guidelines, can prevent missteps and avoid a subsequent allegation of the adjuster being “out to get” the insured claimant and thus breeching its duty to conduct itself in good faith.

Obtaining a non-waiver agreement or a reservation of rights letter is often a prudent step, and, indeed, may be a legal requirement when a claim is expected to be denied.  In Rosenblood Estate v. LSUC, the Court held that, in a case of questionable coverage, the insurer should advise the insured that it is investigating “at once“, and obtain a non-waiver agreement or deliver an adequate reservation o
f rights letter. Otherwise, it may be estopped from denying the claim at a later date.¹³

Frequent peer, supervisor, claims committee and senior management review of a coverage denial file based on a fraud allegation is strongly recommended. This should be done regularly and at different stages of the claim process.  The retention of an independent claims professional to do a file review or attend at mediation or pre-trial conference is also an effective strategy. Any appearance of impropriety is diminished with fresh eyes and an objective outlook.

Document management protocol is crucial when investigating a potentially fraudulent claim. Courts expect that insurers will investigate and assess claims in a balanced, objective and reasonable manner and make decisions based on evidence, not suspicion and innuendo. Be aware that the entire file may be subject to production at some point during the litigation. Be professional and careful about what is written in notes and e-mails and what is included in the files of independently hired claims professionals.

Conclusion

In suspected fraud claims it is advisable to establish and follow prudent claims handling practices. Don’t be intimidated by the threat of a bad faith claim. The claim for punitive damages will undoubtedly be advanced but with proper investigation and management of the file, you can proceed with confidence.Insurers can begin to contemplate a collective sigh of relief with the 2011 Sagl decision wherein it was stated “care must be taken to avoid hindsight determinations when considering whether to order punitive damages. Such an analysis would simply make [the insurer] liable for punitive damages because a belief that it reasonably held turned out to be wrong.”¹⁴

Lauren Bloom is a senior associate with Blouin, Dunn LLP.

1. Insurance Bureau of Canada, (1993).  Initial Estimates of Property and Casualty Insurance Fraud in Canada: Evidence from a Review of Closed Claims Files.  
2. Canadian Underwriter, December 2006 article
3. Canadian Coalition Against Insurance Fraud website, citing number from poll “Canadians and Personal Injury Fraud: A Survey of Canadians”.  Poll conducted in 2000 by POLLARA for Insurance Bureau of Canada
4. Alavie v. Chubb Insurance Co. of Canada [2005] O.J. No. 776
5. Whiten v. Pilot Insurance co. 2002 SCC 18.
6. Redican v. Nesbitt [1924] S.C.R. 135 at 157.
7. Credit Foncier v. Halifax Insurance Co.( 1985), 67 N.S.R. (2d) 142 (C.A.)
8. Sagl v. Chubb Insurance Co. of Canada, [2011] O.J. No. 3974
9. Ibid, par.55.
10. Sagl v. Chubb Insurance Co. of Canada, [2011] O.J. No. 3974,     par 53.
11. Ibid, par.282.
12. Hariri v. Allstate Insurance Co. [1998] I.L.R. 1-3500
13. [1989] O.J. No 240
14. Ibid, note 8, par. 284.